Latin America in a Global Context - Economic Briefing June 2003

Chance of Recovery in 2003 Dim

With the first half of year almost over, it is evident that the much-hoped for recovery will not materialise this year, as all economic regions are growing below -potential. Asia, which had virtually escaped the detrimental impact of the Iraq war on consumer and business confidence, now suffers the blow of the pneumonia variant SARS even though the spreading of the disease seems to be contained. In the United States, consumer confidence is picking up and an increasing number of people are looking for a new job, which may augur a strengthening in the immediate future. In Europe, the situation remains serious despite the European Central Bank’s decision to ease monetary policy, as most economies remain mired in a deep slump characterised by high unemployment and excessive fiscal deficits.

Global outlook lowered amid weaker prospects for the U.S., Europe and Asia
The global outlook continues to deteriorate even though the latest signs from the economies around the world give rise to hopes that the long-awaited turnaround could finally materialise. The atypical lung disease SARS (Severe Acute Respiratory Syndrome), which mostly threatens the Asian economies, appears likely to have a less devastating impact than feared earlier. As of 6 June, the cumulative total of cases has reached 8,404 compared to 7,183 probable cases reported at the time of writing the last Consensus Forecast (9 May). Thus, the much-feared rapid spreading of the disease throughout Asia and other regions has not realized. Even though the forecast for Asia was lowered yet again over last month by 0.2 percentage points, the region will still grow in excess of 5%. The sentiment for other economic areas regions has worsened despite some promising signs. The United States outlook was lowered a notch over last month, even though consumer confidence surged again in May and the labour market is developing better than expected. Growth forecasts for the Euro Area were lowered by 0.2 percentage points, despite the loosening of the monetary policy, as the structural problems are keeping unemployment high and are undermining fiscal balances.

Consumer confidence jumps for the second consecutive month
The economy in the United States is sending mixed signals, albeit with a clear penchant on the upside. While private and public sector economists remain sceptical about the potential for a rebound of the U.S. economy, consumers are regaining optimism. In May, consumer confidence surged for the second consecutive month. Moreover, according to University of Michigan’s consumer survey, the May figure was bolstered by rising expectations that the economy would improve, whereas the current financial situation is viewed quite negatively. Optimism about the economic prospects is spreading quickly, as twice as many consumers expected the economy to improve during the year ahead in May than two months ago. However, the study concludes that while consumer spending is likely to spark a revival in the overall economy, the gains will be uneven over time and across products, with strong gains in interest-sensitive purchases such as homes and vehicles and more subdued buying attitudes toward appliances, furniture, home electronics and other household items. Finally, consumers continue to lose confidence in the Bush administration’s economic policies. Since the beginning of 2003, consumers’ assessment of the government’s economic policies has continuously deteriorated despite the recently enacted tax cuts.

Unemployment rises as more people are looking for jobs
Consumers also remain concerned about recent job losses and income declines. In May, unemployment increased a notch over April to 6.1%. However, while this level marks the highest rate since 1994, the increase was mostly due to the fact that more people resumed their job searches, but failed to find work. The decline in payrolls was much less pronounced than expected (17,000) and April data were revised, with results showing that job losses were not nearly as steep as previously reported. Moreover, the Bureau of Economic Analysis (BEA) revised its numbers for first quarter gross domestic product (GDP) upwards. According o the latest, “preliminary” estimate, GDP increased at an annual rate of 1.9% in the first quarter of 2003 over the same quarter last year versus 1.6% reported in the advance estimate and 1.4% growth in the final quarter of 2002. The upward revision was mainly due to higher than estimated private consumption whereas investment was revised downward.

Fiscal balances deteriorate as Bush administration opens coffers
Meanwhile, the outlook for the U.S. fiscal balances continues to deteriorate at a rapid pace. Exactly one year ago, expectations shifted from a small fiscal surplus to a small deficit. With the exception of only one month, the perceptions have deteriorated ever since. This month, the Consensus for the fiscal deficit moved downwards again, from 2.8% of GDP expected last month to the current 3.0%, which is the limit set for Euro member states in the Stability and Growth Pact. However, rather than being the result of an erosion in revenues in the light of slumping economic growth, the deficit is ballooning as a result of the Bush administration’s opening of the fiscal gates to stimulate the economy. The sizeable fiscal stimulus may be augmented by even further monetary easing. In early June, the chairman of the Federal Reserve, Alan Greenspan, indicated that interest rates will probably remain low for months and may even decline further, as deflation risks, while considered low, continue to linger. The current improvement in some economic indicators and economic policy that could hardly be more stimulating could presage that the U.S. economy will soon experience the long-awaited turnaround. So far, however, the economists polled remain sceptical and have again sliced their forecasts for this year’s economic growth a notch from last month to 2.2%, while maintaining the outlook for next year unchanged at 3.3%.